DETECTION OF FUNCTIONAL FORM MISSPECIFICATION IN COINTEGRATING RELATIONS

A simple specification test based on fully modified residuals and the cumulative sum ~CUSUM! test for cointegration of Xiao and Phillips ~2002, Journal of Econometrics, 108, 43– 61! are considered as means of testing for functional form in long-run cointegrating relations+ It is shown that both tests are consistent under functional form misspecification and lack of cointegration+ A simulation experiment is carried out to assess the properties of the tests in finite samples+ The Dickey–Fuller test is also considered+ The simulation results reveal that the first two tests perform reasonably well+ However, the Dickey–Fuller test performs poorly under functional form misspecification+